The case of the “super-input VAT credit policy”, for chip manufacturer companies in China, as the newest tool, in the field of international tax competition.
For VAT purposes, the main tax benefit, for taxable persons, tends to be associated with the granting of the so-called “full exemptions” or the implementation of 0% tax rates (i.e., allowing taxable persons to deduct the input VAT, paid in the acquisition of goods/services to be use when carrying out exempted activities).
Other socially driven exemptions (e.g., rendering of medical services, education, welfare, etc.), despite benefiting the final consumer, effectively penalize taxable persons (since they cannot deduct the corresponding input VAT).
However, one of the most interesting tax benefits, in the field of taxes on consumption, is the granting of increased amounts of deductible input VAT.
An example of this is the so-called “super-input VAT credit policy”, recently adopted by the Chinese government with the objective of supporting the development of Integrated Circuit (IC) corporations[1].
From 2023 up until 2027, all entities engaged in IC designing, manufacturing, packaging and testing are eligible for an extra 15% of VAT credit (i.e., taxable persons carrying out IC activities will be eligible to deduct VAT at a rate of 115%)[2].
Which means that, if a given (eligible) corporation has 100 CN¥ of deductible VAT (in a specific tax period), it will have the right to effectively deduct 115 CN¥.
Even though the Chinese Tax Administration has not yet disclosed the list of all the qualified corporations eligible for this “super-input VAT credit”, it is settled that this “extra” deduction will cover input VAT, which has been incurred in external purchases of chips.
This particular tax benefit shows how malleable VAT is, and, despite having been completely neglected, by the EU-VAT common system – at least up until now – it clearly has some obvious/notorious benefits. Such as:
- Without distorting the principle of neutrality, and without interfering with the VAT “mechanics” (i.e., passing the tax on to final consumer and the right to deduct input VAT), it allows an effective decrease of payable VAT;
- By boosting the amount of deductible VAT (i.e., by increasing the volume of the tax credit) it promotes liquidity and competitiveness.
The most probable reason for the lack of interest shown by EU (and Member States) in implementing a tax benefit of this sort, is the fact that it may be seen as a State aid (which would go against EU rules and regulations).
However, such an understanding should be disputed, given that what actually occurs is the forfeit of the tax creditor to a percentage of due VAT (meaning that, instead of considering it as State aid, one must perceive “input-VAT credit” legal schemes as amendments in the tax system of a given jurisdiction, within the context of the regular enforcement of its tax sovereignty).
What should be questioned is the legitimacy of EU Member States to implement a tax benefit of this sort, considering the full harmonization of EU-VAT, and the need to request special authorization, under Article 395 of Directive 2006/112/EC, to derogate the common system standards/rules.
We should, nonetheless, pay attention to the possibility for an upsurge on the use of “input-VAT credit” benefit schemes in a post-Pillar 2 (OECD) implementation world. Given that constrictions on tax sovereignty (by the mandatory adoption of a minimum worldwide tax rate) will eventually lead States (particular developing countries) to find other ways to attract (and sustain) private investment.
This means that VAT – and other Goods and Services Taxes (GST) – will quite certainly become one of the most relevant playfields for international tax competition… truly a game-changer!
Nevertheless, this leads us to another question: Considering the constrictions for changes in the EU-VAT common systems, will Member States have the chance to promote “super-input VAT credit schemes”, in the same way as China? In due of the abovementioned lack of flexibility of the EU-VAT common system rules/regulations, I personally doubt it. Which would then imply that the EU would become a lesser competitor, for tax purposes, in gathering/attracting new economic players.
A cause for worrying? The future will tell.
Pedro Costa Monteiro
June 2023
[1] Ministry of Finance (MOF) and State Taxation Administration (STA) for The People’s Republic of China – Caishui [2023] No. 17 (Circular 17).
[2] There is, also, a prevailing policy that, despite not being cumulative with this “super-input VAT credit”, allows, during this current year, an additional 5% or 10% super-input VAT credit for taxpayers engaging in certain services (i.e., input VAT is to be credited, in these cases, at rates of 105% or 110%).